Energy Sector's Cycle About to Turn (Lower)

By Adam O'Dell, CMT, Chief Investment Strategist, Dent Research

To Everything (Turn, Turn, Turn)… There is a Season (Turn, Turn, Turn)~ The Byrds

Hi Subscriber,

Energy stocks have been on a tear recently.

The SPDR Energy Sector ETF (NYSE: XLE) gained a whopping 34% in less than five months, between January 20 and June 8, 2016.

This move easily caught the attention of the financial media. And since energy stocks came into 2016 already 40% off their 2014 highs, the early-year rally led many analysts to conclude that "the bottom is in" for energy stocks.

The investment that triggered the Great Depression is at it again. And unfortunately, it's sitting in the portfolios of 81% of retirees over 65. It's not stocks or bonds, but they will both crash when its bubble bursts. Here's proof…

You see, there's a seasonal pattern to financial markets.

Stocks typically make most of their gains between November and April. Then they produce lackluster returns (with more volatility) between May and October.

The seasonal pattern doesn't play out exactly like this each and every year. But when you look at decades' worth of data… that's the seasonal tendency you'll find.

Energy stocks are also influenced by seasonal factors. Oil refineries typically do routine maintenance during the first quarter of the year. During the second quarter, refineries switch from producing winter-blend fuel to summer-blend. What's more, demand for various petroleum products goes through seasonal cycles, as the weather changes.

All told, seasonal influences affecting the energy supply chain create a rather predictable pattern for energy stocks. They're typically strongest between late-February and early-May. Then they're weakest between mid-May and late-September.

Take a look for yourself…

This chart shows the average monthly return of the SPDR Energy Sector ETF (NYSE: XLE) for each calendar month of the year:

As you can see, it typically pays to be invested in energy stocks between February and May… then out of energy stocks between May and September.

This seasonal pattern of strength and weakness applies to the energy sector ETF (XLE). But it also applies to a number of related, energy-market ETFs, including, the SPDR Materials Sector ETF (NYSE: XLB), the SPDR Oil & Gas Exploration ETF (NYSE: XOP), the SPDR Oil & Gas Equipment & Services ETF (NYSE: XES), and the price of oil itself, as seen by the United States Oil Fund LP (NYSEArca: USO).

For each of these, the pattern is roughly the same: strength between February and May, then weakness between May and September.

Take a look at the average monthly performance of this "Energy Portfolio," which includes equal investments in each of the five ETFs above (XLE, XLB, XOP, XES and USO):

At this point, energy prices are more likely at a peak than a bottom. And if this chart doesn't keep you out of energy-market investments for the next few months, I don't know what will.

Of course, if you're open-minded and willing to bet against energy-related investments… now is a great time to make some bearish bets.

In fact, I've recommended two bearish bets on the energy sector to my Cycle 9 Alert readers. One is a bet against the energy sector, in general. We're positioned for lower prices between now and mid-September.

The other is a specific bet against a foreign energy producer… one that just so happens to be in a world of hurt. It's mired in a political corruption scandal and is facing a multi-billion dollar pension shortfall. Basically, the company is trash… and I estimate its stock price could be cut in half between now and October.

I just recommended this position last week, so there's still time to get in. The specific investment I told Cycle 9 Alert readers about is still within my recommended entry price range… and I estimate this investment could triple your money, at least, if the stock gets knocked lower during the energy sector's seasonal summer slump. Click here to gain access.

Again, regardless of what you do… I suggest not buying into the energy-sector hype.

To good profits,

Adam O'Dell, CMT Chief Investment Strategist, Dent Research

Subscribe to Our Premium Monthly Newsletter

Will you be one of the millions of Americans devastated by the coming safe asset slaughter? As a subscriber to Boom & Bust, Harry Dent, Rodney Johnson and Adam O'Dell will make sure you're not. In fact, they'll help you profit from the chaos that lies ahead.

IN THE MEDIA

Economy & Markets: You are receiving this e-mail as a part of your free subscription to the Economy & Markets E-Letter.

As an Economy & Markets Daily subscriber, you're eligible for the full details on Harry Dent's most disturbing prediction in years. To uncover which one of the market's safest and most popular investments is about to get slaughtered, click here now to view his presentation.

LEGAL NOTICE: Protected by copyright laws of the United States and international treaties. This e-letter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the worldwide web), in whole or in part, is strictly prohibited without the express written permission of Delray Publishing.

This work is based on SEC filings, current events, interviews, corporate press releases and what we've learned as financial journalists. It may contain errors and you shouldn't make any investment decision based solely on what you read here. It's your money and your responsibility. The information herein is not intended to be personal legal or investment advice and may not be appropriate or applicable for all readers. If personal advice is needed, the services of a qualified legal, investment or tax professional should be sought. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation.